SEC’s floating-NAV proposal slowly sinking

At a Financial Services Subcommitee hearing today, Republicans appeared to be backing away from a Securities and Exchange proposal that would force money-market funds to adopt a floating net asset value. That’s a proposal the mutual fund industry has fought for several months.
Regulators and some members of Congress have proposed forcing money market funds to adopt a floating NAV — as opposed to trying to keep a stable $1 share price — as a result of concerns about the stability of such funds stemming from the 2008 financial crisis.
In September that year, the Reserve Primary Fund, from Reserve Management Co. Inc., broke the buck when its net asset value fell to 97 cents a share. The federal government stepped in to provide a reserve for reeling funds.
Last year, the President’s Working Group on Financial Markets proposed eight reforms to provide greater stability in the money market fund industry. Among those proposed reforms was allowing money market funds to have a floating NAV.
The industry has been protesting the idea, saying that it would cause money market funds to become extinct.
And in opening comments during this morning’s hearings, Rep. Scott Garrett, R-N.J., chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, agreed that there are concerns about the floating NAV concept.
“I am not convinced that replacing a stable NAV with a floating NAV solves the worry about runs in money market funds. There is compelling evidence that [implementing a floating NAV] would lead to a loss of access to a significant source of short-term funding,” Mr. Garrett said.
“A floating NAV would also impact investors of all shapes and sizes,” he said.
Mr. Garrett also suggested that if the floating NAV was implemented it would have dire consequences for the money fund industry.
“While I can understand some level of concern about money market funds, we can’t ignore concerns about banks, which is likely where much of the money now invested in money market funds would migrate to if a floating NAV is instituted,” he said.
In separate remarks Rep. Randy Neugebauer, R-Texas, echoed Mr. Garrett’s concerns about a floating NAV, and posed questions to fund officials about whether their alternate proposals to address concerns about money market funds could cause their own sets of issues.
In his testimony and follow-up comments, Paul Schott Stevens, president and chief executive of the Investment Company Institute, which represents the fund industry, discussed the merits of the ICI’s proposal to establish a liquidity bank to which all money market funds would contribute. The bank would help backstop funds in case of an investor panic.
Likewise, Scott Goebel, senior vice president, secretary and general counsel at Fidelity Management & Research Co., discussed his firm’s proposal, under which money market funds would create a capital reserve or an “NAV buffer” by charging investors more over a period of time.
In his testimony and follow-up remarks, however, Mercer Bullard, an associate professor at the University of Mississippi School of Law, said that a buffer wouldn’t prevent another run on money funds if another crisis occurs.
“Three percent might be a reasonable buffer, but Lehman’s holdings were 4%, then the buffer would be exceeded,” he said. “There would still be a run on money funds.”
At least one member of Congress appeared to favor Fidelity’s buffer proposal.
The Fidelity proposal is “thoughtful and responsible,” said Stephen Lynch, D-Mass.
“I think it could work,” he said. “I just need to learn more about it.”